Reserve Requirements and the Inflation Tax

Brock, Philip L.

doi:10.2307/1992581

“…Mandatory purchases of government debt and below market interest rates are other important sources of public income. The regulation of the reserve requirement plays an important role but we think of it as a part of the overall inflation tax or seigniorage (see Brock (1989)). …”

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confidence: 99%

“…Mandatory purchases of government debt and below market interest rates are other important sources of public income. The regulation of the reserve requirement plays an important role but we think of it as a part of the overall inflation tax or seigniorage (see Brock (1989)). large changes in reported income {ie, where tax evasion is large) the government will choose to repress the financial sector in order to expand money demand and increase the tax rate on money.…”

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confidence: 99%

A Growth Model of Inflation, Tax Evasion, and Financial Repression

Roubini¹,

1992

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractIn this paper we study the effects of policies of financial repression on long term growth and try to explain why optimizing governments might want to repress the financial sector. We also explain why inflation may be negatively related to growth, even though it does not affect growth directly. We argue that the main reason why governments repress the financial sector is that this sector is the source of "easy" resources for the public budget. The source of revenue stemming from this intervention is modeled through the inflation tax. Our model has the implication . that financial development reduces money demand. Hence, if the government allows for financial development the inflation tax base, and the chance to collect seigniorage, is reduced. To the extent that the financial sector increases the efficiency of the allocation of savings to productive investment, the choice of the degree of financial development will have real effects on the saving and investment rate and on the growth rate of the economy.We show that in countries where tax evasion is large the government will · optimally choose to repress the financial sector in order to increase seigniorage taxation. This policy will then reduce the efficiency of the financial sector, increase the costs of intermediation, reduce the amount of investment and reduce the steady state rate of growth of the economy. Financial repression will therefore be associated with high tax evasion, low growth and high inflation. Before the 1970s, many economists favored policies of financial repression on several grounds. First, it was argued that. the government needed to impose anti-usury laws thereby intervening in the free determination of interest rates.Second, strict control and regulation of the banking system was said to give the monetary authorities a better control over the money supply. Third, it was thought that governments knew better than markets and private banks what the optimal allocation of savings was or what kind of investments were more or less desirable from a social perspective. Fourth, financial repression was identified with interest rates below market rates, which reduced the costs of servicing government debts.Some of the recent growth literature deals with the theoretical links between financial intermediation and growth along two lines:2 first, it analyzes how financial intermediation affects economic growth; second, it studies how economic gro...

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“…Thus, this paper extends the literature on optimal single reserve requirementsa literature that includes contributions by Freeman {1987), Brock (1989), Bencivenga and Smith (1992), Mourmouras and Russell (1992), Cothren and Waud (1994), and E:spinosa and Yip (1996) -to the case of multiple reserve requirements.…”

Section: Introductionmentioning

confidence: 69%

“…Since the government is free, if it wishes, to offer different and higher-yielding bonds to nonbank lenders, it should also be free to impose any reservable bond rate it choosea. 1 The principal purpose of this paper is to detennine whether an optimizing government l In some multiple-reserves regimes, the government gives banks the option of holding either currency or reservable government bonds to satisfy the second reserve requirement. In this case, it is clear that the banks will not p\ll"Cha.9e ceservable bonds unless their nominal interest rate is non-negative.…”

Section: Introductionmentioning

confidence: 99%

Are There Optimal Multiple-Reserve Requirements?

Espinosa‐Vega

¹

,

Russell

²

2001

Journal of Financial Intermediation

0

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: A number of developing countries have adopted deficit-finance regimes involving multiple reserve requirements. One question the previous literature on this phenomenon has not addressed is Mlether multiple-reserves regimes can improve on regimes involving single-currency-reserve requirements if the policy settings of the latter regimes are assumed to be chosen optimally. We find that a "conventional" multiple-reserves regime-a regime with positive nominal rates on reservable bondscarmot Pareto-improve an optimal single-currency-regime but can, in some cases, increase social welfare over such a regime. Terms of use: Documents in EconStor may

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“…Parameter determines the reserve requirement ratio in the model and is calibrated to match the observed reserve requirements in each group of countries. We measure reserve requirements in the data following Brock (1989), who computes reserve requirements as the ratio of monetary base less currency outside banks to M2 less currency outside banks. This gives us equal to 0.03 in developed countries and 0.10 in developing economies over our sample period.…”

Section: Functional Forms and Parametersmentioning

confidence: 99%